Fed May Need to Provide More Stimulus, Williams Says

If unemployment stays high, inflation too low, and economic growth remains moderate, the U.S. Federal Reserve may need to provide new stimulus to the economy, a top Fed official said on Tuesday.

Despite "heartening" third-quarter gross domestic product growth of 2.5 percent, the basic story is still one of "slow recovery from an especially severe financial crisis and recession, painfully gradual progress on unemployment, and receding inflation," San Francisco Federal Reserve Bank President John Williams said in prepared remarks to the Greater Phoenix Chamber of Commerce,

With consumers feeling "lousy" and the housing market moribund, he said, that trajectory is likely to continue.

"It is a story that calls for continued action by the Federal Reserve to support a fragile economy," said Williams, who rotates into a voting spot on the Fed's policy-setting panel next year. "Additional monetary policy accommodation -- either in the form of additional asset purchases or further forward guidance on our future policy intentions -- may be needed to bring us closer to our mandated objectives of maximum employment and price stability," he said.

The Fed has taken extraordinary measures to try to goose growth since the Great Recession, keeping interest rates near zero for almost three years and signaling it will leave them there through at least mid-2013.

It has also bought more than $2.3 trillion in long-term securities, bringing its balance sheet to record levels, and in September the Fed announced a $400 billion program to restock its portfolio with longer-term securities to push long-term borrowing costs still lower.

At its most recent policy meeting earlier this month, the Fed voted 9-1 to keep that policy on hold, with one voter, Chicago Fed President Charles Evans, urging more action.

GDP growth is likely to stay at a moderate 2.5 percent next year, picking up to 3 percent the following year, Williams said Tuesday.

Unemployment, now at a lofty 9 percent, will fall to just 8.75 percent by the end of next year and 8 percent by the end of 2013, Williams forecast. And inflation, now well above the Fed's informal 2-percent target, will likely drop to 1.5 percent in 2012 and 2013, he said.

While it is possible that economic conditions could improve faster than expected or inflation could show signs of rising, that scenario is less likely than continued moderate growth, Williams said.

The biggest risk to that economic outlook is a shock to the world financial system from Europe, triggered by a possible Greek debt default, he said.

A San Francisco Fed study released Monday suggested a rising chance of recession, to more than 50 percent in early 2012, when taking such international risks into account.

While reining in the U.S. federal deficit is important for economic health, Williams said, it means that government spending programs or other fiscal stimulus are unlikely.

"Under these circumstances, it's vital that the Fed use a full range of tools to achieve its mandated employment and price stability goals," he said.

If unemployment stays high, inflation too low, and economic growth remains moderate, the U.S. Federal Reserve may need to provide new stimulus to the economy, a top Fed official said on Tuesday.Despite heartening third-quarter gross domestic product growth of 2.5 percent,...